Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, September 1, 2023

AI Summary. Both household and payroll employment stand about 1.5mm above the Congressional Budget Office's pre-pandemic projections, and aggregate hours grew strongly alongside an uptick in average weekly hours. Average hourly earnings growth was the slowest in over a year and a half, a noisy and revision-prone series that is the report's biggest sign of cooling.

Jason Furman @jasonfurman
Date Posted:

.@jasonfurman believes today’s job report is consistent with “continued moderation in inflation” and doesn’t believe the Fed needs to hike another 25bps in September.

Is employment running above pre-pandemic projections while wage growth cools?

Core argument: Both household and payroll employment stand 1.5mm above CBO's pre-pandemic projections, according to Jason Furman, who notes that talk of "missing workers" persisted longer than the data justified.

Overall both household and payroll employment are 1.5mm higher than CBO's pre-pandemic projections. It doesn't feel that long ago that people were talking about missing workers (talking about it for longer than was justified by the data I might add). Pretty much the only thing that went in the direction of tighter was average weekly hours ticked up but this series is noisy because of rounding and measurement issues. As a result, aggregate hours grew strongly as well. Average hourly earnings growth was the slowest in over a year and a half. This is noisy, subject to revision, but even adjusting for that perhaps the biggest sign of cooling in this report.

Takeaways by Macro Roundup® AI

  1. Both household and payroll employment stand 1.5mm above CBO's pre-pandemic projections, according to Jason Furman, who notes that talk of "missing workers" persisted longer than the data justified.
  2. Average hourly earnings growth was the slowest in over a year and a half, which Furman calls perhaps the biggest sign of cooling in the report even allowing for noise and revisions.
  3. Average weekly hours ticked up, the only component moving toward tighter conditions, and aggregate hours grew strongly as a result, though Furman notes the hours series is noisy because of rounding and measurement issues.

Related Articles:

  • Has the Fed Tightened Enough? Guideposts to Consider — Wage growth of about 2.5% would be consistent with 2% inflation given low recent-trend productivity growth, but wage growth is running near 4.5%. On this view inflation is more likely to level out at its current rate than keep falling, pushing the Federal Reserve toward further tightening through rate rises or holding rates high.
  • Auto Union Boss Wants 46% Raise, 32-Hour Work Week in ‘War’ Against Detroit Carmakers — The United Auto Workers union has demanded a 46% raise, a return to traditional pensions, and a 32-hour work week from the three Detroit automakers. The companies say meeting those demands would raise labor costs by $80bn and lift total pay and benefit expenses to more than $150 an hour from about $64.
  • Unions’ Inflation Warning? — The share of people aged 16 and over working or looking for work fell when the pandemic hit and has only partly recovered, with population aging accounting for most of the remaining shortfall. That implies economic activity must run at a lower level to avoid persistent wage and price inflation.

AI Summary. Short-term interest rates are set at the discretion of the Federal Reserve's policy committee rather than by markets, and the Fed also tries to influence longer-term rates, sometimes by buying or selling bonds outright. The author argues central banks could conduct such trades directly instead of paying intermediaries, as the Bank of Japan does.

Matt Klein The Overshoot
Date Posted:

.@M_C_Klein argues that the Fed might need to follow the BOJ in controlling yield curves to manage the scale of debt issuances.

Should central banks trade bonds directly instead of paying intermediaries?

Core argument: Short-term interest rates are set at the discretion of the roughly 18 members of the FOMC rather than determined by markets in any normal sense, while Fed officials try to move longer-term rates, sometimes by buying or selling bonds outright.

[Short-term interest rates] are not “market-determined” in any normal sense, but chosen at the discretion of the ~18 members of the FOMC. Longer-term interest rates are not explicitly set by the Fed, but Fed officials try to make those rates go up or down when they think it is necessary to achieve their policy objectives, sometimes by buying or selling bonds outright. If the point of maintaining “market functioning” is to prevent spikes in yields that could hurt borrowers in the real economy while facilitating transactions of bonds for cash, central banks are already better-positioned to do those trades directly than anyone else. What would be the point of involving intermediaries, except to pay them for a service that could be provided in-house? This is effectively what the BOJ has been doing for years, laying out target ranges for yields at points on the curve, adjusting those ranges as needed, sometimes buying oodles of Japanese Government Bonds (JGBs), and often doing nothing.

Takeaways by Macro Roundup® AI

  1. Short-term interest rates are set at the discretion of the roughly 18 members of the FOMC rather than determined by markets in any normal sense, while Fed officials try to move longer-term rates, sometimes by buying or selling bonds outright.
  2. If the purpose of preserving "market functioning" is to prevent yield spikes that could hurt real-economy borrowers while facilitating exchanges of bonds for cash, central banks are already better-positioned to execute those trades directly than anyone else.
  3. The Bank of Japan has for years laid out target ranges for yields at points on the curve, adjusted those ranges as needed, sometimes bought large volumes of Japanese Government Bonds, and often done nothing.

Related Articles:

  • Resilience Redux in the US Treasury Market — The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.
  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.
  • The Fed and the Secular Decline in Interest Rates — The authors find that the long-run decline in US Treasury yields since 1980 is fully accounted for by movements in a narrow window around Federal Reserve policy meetings, while yield changes outside that window prove transitory. They suggest the Federal Reserve conveys information to markets about the long-run level of interest rates.

AI Summary. Hedge funds' short positions in 2-, 5-, and 10-year Treasury futures rose by $411bn, consistent with renewed use of the cash-futures basis trade, which pairs short futures with long cash Treasury positions financed in the repo market. The Federal Reserve identifies this highly leveraged trade as a financial stability vulnerability.

Daniel Barth, R. Jay Kahn and Robert Mann Federal Reserve Board
Date Posted:

Similar to 2019/early 2020, hedge funds are again arbing away differences between Treasury futures and cash prices in large size; unwinding of the “cash-futures trade” likely contributed to the March 2020 Treasury market instability.

Are hedge funds rebuilding leveraged Treasury basis trades?

Core argument: Hedge fund short Treasury futures positions in the 2-year, 5-year, and 10-year contracts rose by $411 billion between October 4, 2022 and May 9, 2023.

Hedge fund short futures positions in the 2-year, 5-year, and 10-year contracts rose by $411 billion between October 4th, 2022 and May 9th, 2023. Consistent with these empirical trends, spreads on the trade suggest it has been profitable at several points in recent months, without considering the value of options embedded in the trade (and whose value has likely increased as measures of Treasury market uncertainty have risen). The cash-futures basis trade is an arbitrage trade that involves a short Treasury futures position, a long Treasury cash position, and borrowing in the repo market to finance the trade and provide leverage. This trade presents a financial stability vulnerability because the trade is generally highly leveraged and is exposed to both changes in futures margins and changes in repo spreads. Hedge funds unwinding the cash-futures basis trade likely contributed to the March 2020 Treasury market instability.

Takeaways by Macro Roundup® AI

  1. Hedge fund short Treasury futures positions in the 2-year, 5-year, and 10-year contracts rose by $411 billion between October 4, 2022 and May 9, 2023.
  2. Spreads on the cash-futures basis trade — a short Treasury futures position paired with a long cash Treasury position financed in the repo market — suggest the trade has been profitable at several points, before counting the value of its embedded options.
  3. The cash-futures basis trade presents a financial stability vulnerability because it is generally highly leveraged and exposed to changes in futures margins and repo spreads, and hedge funds unwinding it likely contributed to the March 2020 Treasury market instability.

Related Articles:

  • Resilience Redux in the US Treasury Market — The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.
  • Who Has Been Buying U.S. Treasury Debt? — Net purchases of U.S. Treasury securities by the "households and nonprofits" category have soared, more than offsetting sales and redemptions by money market funds, the Federal Reserve, and banks; much of this buying likely reflects hedge funds. The composition of Treasury financing has shifted dramatically as bond prices fell.
  • A Beautiful Replenishment — Money market funds buying Treasury bills lets bank reserves be replenished as cash moves from the Federal Reserve's overnight reverse repo facility into the Treasury's account and back out through government spending. The author argues reserves should stay abundant, allowing the Federal Reserve's balance sheet runoff to continue about two more years.

AI Summary. The share of Americans saying the ideal family has three or more children rose to 44% from about one-third in the mid-1990s, while the share favoring two children fell to 51.7% from 62%, according to the University of Chicago's General Social Survey. This rise in stated ideal family size came as the actual number of births declined.

Josh Zumbrun Wall Street Journal
Date Posted:

According to surveys, Americans want larger families than they actually have. Ideal family size has changed very little since the mid-70s.

Do Americans want larger families than birthrates suggest?

Core argument: The share of Americans citing three or more children as the ideal family size rose to 44% in 2022, up from about one-third in the mid-1990s, according to the University of Chicago's General Social Survey.

Most Americans still overwhelmingly stick to an ideal of two to three children. In fact, the share of people saying they want three or more children has risen as the actual number of children being born has dropped. By the mid-1990s, about one-third of Americans said the ideal family had three or more children. But since then, the share of respondents citing an ideal of three or more children has gradually climbed. Despite dipping briefly after the pandemic, that group rebounded again in 2022 to 44%, according to the General Social Survey, the more than 50-year-old survey of Americans’ social views conducted by the University of Chicago. Meanwhile, the share of people who say the ideal family consists of two children slipped to 51.7% in 2022 from 62% in 1998. On average, the ideal family is 2.5 children, which is up slightly from the 1990s but relatively little changed over the course of 50 years.

Takeaways by Macro Roundup® AI

  1. The share of Americans citing three or more children as the ideal family size rose to 44% in 2022, up from about one-third in the mid-1990s, according to the University of Chicago's General Social Survey.
  2. The share of Americans naming two children as the ideal fell to 51.7% in 2022 from 62% in 1998, according to the General Social Survey.
  3. Americans' average ideal family size is 2.5 children, up slightly from the 1990s but relatively little changed over 50 years, even as the actual number of children being born has dropped.

Related Articles:

  • Young Adults in the U.S. Are Reaching Key Life Milestones Later Than in the Past — Pew Research Center analysis of Census Bureau data finds 21-year-olds in the US are less likely than their counterparts four decades earlier to have a full-time job, be financially independent, live on their own, be married, or have a child. Among 21-year-olds, 39% worked full time versus 64% four decades earlier, and a quarter were financially independent versus 42%.
  • Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 — U.S. labor force data show immigrants accounted for 49% of labor force growth over roughly the past three decades and their children another 21%, together about 70% of an increase of nearly 32.8m workers. Immigrants rose from about 10% to 18% of the labor force, and immigrants plus their children from 18% to 29%.

AI Summary. U.S. companies have $600bn in corporate debt maturing this year, a total Goldman Sachs data show rising to more than $1tn a year from 2025 through 2028. Those debt loads, combined with higher financing costs, may cut into corporate profits, investor returns, innovation spending, and hiring, with some analysts expecting credit-rating downgrades.

Greg Ip, Joe Pinsker, Will Parker, Walden Siew, et al. Wall Street Journal
Date Posted:

American firms have $600 billion in debt maturing this year. Between 2025 and 2028 over $1 trillion of corporate debt matures each year.

Will rising corporate debt maturities squeeze profits, hiring, and credit ratings?

Core argument: U.S. companies have $600 billion of corporate debt maturing this year, a total Goldman Sachs data shows rising to more than $1 trillion annually from 2025 through 2028.

U.S. companies have $600 billion in corporate debt set to mature this year, a total that will grow to more than $1 trillion a year from 2025 until 2028. That stark data from Goldman Sachs points to a financial cliff that is coming for American corporations, which executives are trying to navigate by extending the dates their debts come due, refinancing borrowings or managing cash reserves. What’s at stake? The debt loads, coupled with the rising costs of new financing for companies, may cut into corporate profits, investor returns, spending on new ideas, hiring—and could lead to less-healthy balance sheets. Some analysts say there could be a swath of corporate credit-rating downgrades ahead.

Takeaways by Macro Roundup® AI

  1. U.S. companies have $600 billion of corporate debt maturing this year, a total Goldman Sachs data shows rising to more than $1 trillion annually from 2025 through 2028.
  2. Executives are navigating the approaching maturities by extending the dates their debts come due, refinancing borrowings and managing cash reserves.
  3. Debt loads combined with rising financing costs may cut into corporate profits, investor returns, spending on new ideas and hiring, and some analysts say a swath of corporate credit-rating downgrades could lie ahead.

Related Articles:

  • How Is the Corporate Bond Market Functioning as Interest Rates Increase? — The Investment Grade Corporate Bond Market Distress Index has risen only modestly during the current interest-rate tightening cycle and has recently trended sideways, with its peak not substantially above the level reached during the earlier 2015 tightening cycle.
  • Credit Normalization — Excluding Treasury securities, more than $30tn of debt securities are outstanding, and credit spreads, while wider than their 2021 lows, remain within historical ranges. The recent slight deterioration in credit-quality metrics and the rise in bankruptcy filings from historically low levels most likely reflect normalization rather than emerging financial distress.
  • A Default Cycle Has Started — Default rates on high-yield bonds and leveraged loans are rising as more companies default under a higher cost of capital, with the Federal Reserve signaling interest rates will stay at these levels for a couple of years. Tighter financing conditions are the channel through which monetary policy restrains the economy and capital markets.

Tuesday, September 5, 2023

AI Summary. The Committee for a Responsible Federal Budget projects the federal deficit will roughly double to about $2tn for the fiscal year, driven by higher interest payments and lower tax receipts despite robust economic growth. After falling from close to $3tn to roughly $1tn in its largest-ever decline, the deficit turned upward rather than returning to pre-pandemic levels.

Jeff Stein Washington Post
Date Posted:
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According to a @BudgetHawks analysis the US budget deficit will double in 2023 despite economic growth. @jasonfurman notes such deficits typically are associated with a “major crisis” like World War II or the 2008 financial meltdown.

Is the federal deficit doubling even as the economy grows?

Core argument: The Committee for a Responsible Federal Budget projects the U.S. federal deficit will roughly double to about $2 trillion for the fiscal year ending Sept. 30, as bigger interest payments and lower tax receipts widen the imbalance despite robust economic growth.

According to the Committee for a Responsible Federal Budget the federal deficit is projected to roughly double this year, as bigger interest payments and lower tax receipts widen the nation’s spending imbalance despite robust overall economic growth. After the government’s record spending in 2020 and 2021 to combat the impact of covid-19, the deficit dropped by the greatest amount ever in 2022, falling from close to $3 trillion to roughly $1 trillion. But rather than continue to fall to its pre-pandemic levels, the deficit then shot upward. Budget experts now project that it will probably rise to about $2 trillion for the fiscal year that ends Sept. 30. Jason Furman said the current jump in the deficit is only surpassed by “major crises,” such as World War II, the 2008 financial meltdown or the coronavirus pandemic.

Takeaways by Macro Roundup® AI

  1. The Committee for a Responsible Federal Budget projects the U.S. federal deficit will roughly double to about $2 trillion for the fiscal year ending Sept. 30, as bigger interest payments and lower tax receipts widen the imbalance despite robust economic growth.
  2. After falling from close to $3 trillion to roughly $1 trillion in 2022, the largest deficit drop ever, the U.S. deficit shot upward rather than returning to pre-pandemic levels.
  3. Jason Furman said the current jump in the deficit is surpassed only by major crises such as World War II, the 2008 financial meltdown and the coronavirus pandemic.

Related Articles:

  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.
  • There Is No “Stealth Fiscal Stimulus” — The U.S. federal budget deficit has widened by about 3-4 percentage points of GDP, with lower revenues mostly attributable to a plunge in capital gains tax receipts after an earlier windfall and to the collapse in Federal Reserve payments to the Treasury. Higher outlays are almost entirely attributable to surging interest payments on Treasury debt.
  • US Fiscal Alarm Bells Are Drowning Out a Deeper Problem — The Congressional Budget Office projects US federal debt held by the public at 98% of national income, within 7.6 percentage points of its 1946 wartime peak and on track to exceed it by 2028. International Monetary Fund forecasts show US debt surpassing Italy's by 2028 and Greece's by the end of the decade.

AI Summary. Growth theory holds that long-run growth in living standards is determined by growth in the worldwide number of people searching for ideas, and growth accounting for the US suggests temporary boosts from rising educational attainment and idea investment could fade. Potential offsets include China and India, better talent allocation, and artificial intelligence.

Charles Jones Federal Reserve Bank of Kansas City
Date Posted:

Stanford professor @chadjonesecon argues an improved allocation of talent globally and AI’s emergence as a general purpose technology might help the US maintain the long term 2% GDP/capital growth trend, offsetting stagnating TFP.

Does long-run growth depend on the number of people searching for ideas?

Core argument: Growth theory implies that long-run growth in living standards is determined by growth in the worldwide number of people searching for ideas.

Growth theory reveals that in the long run, growth in living standards is determined by growth in the worldwide number of people searching for ideas. A growth accounting exercise for the US since the 1950s suggests that many other factors have temporarily contributed to growth, including rising educational attainment and a rising investment rate in ideas. But these forces are inherently temporary, implying that growth rates could slow in the future. In contrast, other forces could potentially sustain or even increase growth rates. The emergence of countries such as China and India provides large numbers of people who could search for ideas. Improvements in the allocation of talent — for example, the rise of women inventors — and increased automation through artificial intelligence are other potential tailwinds.

Takeaways by Macro Roundup® AI

  1. Growth theory implies that long-run growth in living standards is determined by growth in the worldwide number of people searching for ideas.
  2. A growth accounting exercise for the US since the 1950s attributes much of measured growth to inherently temporary forces, including rising educational attainment and a rising investment rate in ideas, implying growth rates could slow.
  3. The emergence of countries such as China and India, improvements in the allocation of talent such as the rise of women inventors, and increased automation through artificial intelligence are potential forces sustaining or raising growth rates.

Related Articles:

  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth
  • From Strength To Strength — The US produced $25.5tn in GDP, about 25% of the world total—roughly its 1990 share—while China's share stands at 18%; the US share of the G7's nominal GDP rose from 40% in 1990 to 58%. Income per person is now about 30% above western Europe and 54% above Japan, adjusted for purchasing power.
  • Fully Grown – European Vacation! — Europe's growth slowdown reflects a widespread drop in productivity growth rather than changes in physical capital accumulation, with human capital growth also mattering but varying by country. The productivity decline is larger than in the US: in countries such as the UK and France, productivity growth fell from about 2% to near zero or negative.

AI Summary. Bloomberg Economics projects China's growth slowing to 3.5% by 2030 and near 1% by 2050, below its earlier forecasts of 4.3% and 1.6%. On that path, China's economy would surpass the US only in the mid-2040s, by a small margin, before falling back behind; US potential growth is projected to drift down to 1.5% by 2050.

Jasmine Ng Bloomberg
Date Posted:

Bloomberg Economics now forecasts China’s GDP won’t surpass the US until the mid 2040s, and then by “a small margin” before “falling back behind.” Prior to the pandemic Bloomberg forecasted China would permanently overtake the US by the early 2030’s.

Will China's slowing growth keep it from overtaking the US economy?

Core argument: Bloomberg Economics projects China's growth slowing to 3.5% in 2030 and near 1% by 2050, down from prior projections of 4.3% and 1.6% respectively.

Bloomberg Economics now sees growth in China’s economy — the world’s second largest — slowing to 3.5% in 2030 and to near 1% by 2050. That’s lower than prior projections of 4.3% and 1.6%, respectively. It will take until the mid-2040s for China’s GDP to exceed that of the US — and even then, it will happen by “only a small margin” before “falling back behind.” Before the pandemic, Bloomberg expected China to take and hold pole position as early as the start of next decade. Bloomberg estimates potential US growth at 1.7% in 2022-2023, with long-term forecasts showing a gradual drifting down to 1.5% by 2050.

Takeaways by Macro Roundup® AI

  1. Bloomberg Economics projects China's growth slowing to 3.5% in 2030 and near 1% by 2050, down from prior projections of 4.3% and 1.6% respectively.
  2. Bloomberg Economics expects China's GDP to exceed that of the US only by the mid-2040s, and then by "only a small margin" before "falling back behind," versus a pre-pandemic expectation that China would take and hold the lead as early as the start of the next decade.
  3. Bloomberg estimates US potential growth at 1.7% in 2022–2023, drifting down gradually to 1.5% by 2050.

Related Articles:

  • When Will China’s GDP Overtake America’s? — China's productivity growth has slowed and its working-age population is shrinking, with the UN projecting a decline of more than 100m people aged 15-64 in the 2030s. Several forecasters project China's GDP will overtake America's sometime in the 2030s, while Capital Economics argues that if it does not, it may never happen.
  • How Soon and At What Height Will China’s Economy Peak? — Goldman Sachs now projects China's economy will not overtake America's until 2035 and will peak at only 14% larger, down from an earlier projection of surpassing the US in 2026 and being over 50% larger by mid-century. Capital Economics argues China will reach 90% of America's size in 2035 and then lose ground.
  • The Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.

AI Summary. Real disposable income is forecast to grow 3% over the year, with labor income accounting for over half the increase, interest income adding over 1 percentage point, and a pullback in Medicaid coverage subtracting almost half a point. That pace is below the prior year's 4% but above the roughly 2.5% average in the two decades before the pandemic.

Joseph Briggs Goldman Sachs
Date Posted:

Despite the labor market cooling Goldman Sachs forecasts real income growth of 3% in 2024, “comfortably above the roughly 2½% real growth pace observed in the 20 years prior to the pandemic.”

Is real disposable income growth still outpacing its pre-pandemic average?

Core argument: US real income is forecast to grow 3% in 2024 on a Q4/Q4 basis, below the 4% pace in 2023 but above the roughly 2.5% real growth pace of the 20 years before the pandemic.

We expect real income will grow by 3% in 2024 on a Q4/Q4 basis. In terms of components, expected labor income gains account for over half this increase, we expect interest income increases will raise real income growth by over 1pp, and the pullback in Medicaid coverage [Sunset of pandemic era continuous enrollment provision] is set to subtract almost ½pp. This pace of real income growth is below the 4% pace in 2023, but comfortably above the roughly 2½% real growth pace observed in the 20 years prior to the pandemic. In terms of the timing of these real income gains, we forecast a flatter profile than in 2023, as start-of-year adjustments from COLAs and changes in the effective tax rate will likely be less of a driver of income growth in 2024.

Takeaways by Macro Roundup® AI

  1. US real income is forecast to grow 3% in 2024 on a Q4/Q4 basis, below the 4% pace in 2023 but above the roughly 2.5% real growth pace of the 20 years before the pandemic.
  2. Labor income gains account for over half of the expected 2024 real income increase, interest income is expected to add over 1pp, and the pullback in Medicaid coverage from the sunset of pandemic-era continuous enrollment is set to subtract almost 0.5pp.
  3. The profile of real income gains in 2024 is forecast to be flatter than in 2023, as start-of-year cost-of-living adjustments and changes in the effective tax rate are likely to be less of a driver of income growth.

Related Articles:

  • Soft Landing Optimism Is Everywhere. That’s Happened Before — Analysts argue the historical record offers limited guidance because this has not been a typical business cycle: pandemic shutdowns abruptly halted growth and widespread government stimulus fueled a rapid rebound, producing shortages, bottlenecks and unusually strong demand in unexpected parts of the economy. That disruption contributed to inflation, and the slow return to normal is helping it fade.
  • Has the Fed Tightened Enough? Guideposts to Consider — Wage growth of about 2.5% would be consistent with 2% inflation given low recent-trend productivity growth, but wage growth is running near 4.5%. On this view inflation is more likely to level out at its current rate than keep falling, pushing the Federal Reserve toward further tightening through rate rises or holding rates high.
  • The Unresolved Tension Between Prices and Incomes — Persistent per-worker income growth of about 5% a year is difficult to reconcile with forecasts of 2% inflation, since inflation reflects the gap between nominal spending growth and real production, and wages are the largest source of financing for consumer spending. Interest rates may therefore fall more slowly than market prices imply.

AI Summary. Among firms trading at a discount to book value, European companies show a gross profit-to-assets ratio of 18.5%, 1.5x that of North American value firms, and earnings-to-assets of 6.4%, nearly 3x North America's. The authors argue wide valuation spreads plus higher profitability strengthen the case for European and Japanese value stocks.

Brian Chingono Verdad
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Capital inflows into North American markets have contributed to a 3.9x Price/Book value relative to market averages of 1.9x in Europe and 1.4x in Japan according to @verdadcap_quant. He believes this offers opportunities in both Europe and Japan.

Are European value stocks more profitable than North American ones?

Core argument: Among firms trading at a discount to book value, Europe posts a Gross Profit/Assets ratio of 18.5%, 1.5x the profitability of North American value firms.

We’ve found reasons to think more highly of Europe and Japan. Notably, we find that value stocks in Europe and Japan are more profitable, with Europe being particularly impressive. Among firms that trade at a discount to book value, Europe has a Gross Profit/Assets ratio of 18.5%, which is 1.5x the profitability of North American value firms. The differences are even more stark in terms of EBITDA/Assets, with Europe’s value firms delivering a 6.4% return on assets, almost 3x higher than North America’s profitability among value firms. We believe that the combination of historically wide valuation spreads in Europe and higher levels of profitability among Europe’s value stocks bolster the case for upward mean reversion going forward. Historically, mean reversion in multiples has supported significant outperformance of value relative to growth.

Takeaways by Macro Roundup® AI

  1. Among firms trading at a discount to book value, Europe posts a Gross Profit/Assets ratio of 18.5%, 1.5x the profitability of North American value firms.
  2. Europe's value firms deliver EBITDA/Assets of 6.4%, almost 3x the level of North American value firms, with value stocks in both Europe and Japan more profitable than North American ones.
  3. Historically wide valuation spreads in Europe combined with higher profitability among European value stocks strengthen the case for upward mean reversion, which historically has supported value outperforming growth.

Related Articles:

  • Europeans Are Becoming Poorer. ‘Yes, We’re All Worse Off.’ — Measured in dollars, the eurozone economy grew about 6% over 15 years versus 82% for the U.S., leaving the average European Union country poorer per person than every U.S. state except Idaho and Mississippi. Inflation-adjusted private consumption fell about 1% in the eurozone since late 2019 while rising nearly 9% in the U.S.
  • From Strength To Strength — The US produced $25.5tn in GDP, about 25% of the world total—roughly its 1990 share—while China's share stands at 18%; the US share of the G7's nominal GDP rose from 40% in 1990 to 58%. Income per person is now about 30% above western Europe and 54% above Japan, adjusted for purchasing power.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. Offshore dollar bank lending has contracted outright, with a year-over-year decline of $325bn concentrated in loans to emerging markets, while lending inside the US has plateaued. The pullback is attributed to borrowers facing higher rates and banks facing lower profitability, and is described as a headwind to global growth.

Joseph Wang Fed Guy Blog
Date Posted:

Off-shore non-bank dollar credit is contracting at a rate not seen since the financial crisis as higher US interest rates increase funding costs for foreign borrowers. This may slow global growth. @FedGuy12

Is shrinking offshore dollar lending a headwind to global growth?

Core argument: Off-shore dollar bank lending declined $325 billion year over year as of 2023Q1, a rate of outright contraction not seen since the 2008 financial crisis, with the bulk concentrated in lending to emerging markets.

While bank lending plateaued in the U.S., off-shore dollar bank lending has actually contracted outright at a rate not seen since the 2008 financial crisis. Data as of 2023Q1 indicates a year over year decline of $325b in loans with the bulk of the decline concentrated in lending to emerging markets. This is likely due to both supply and demand factors, where borrowers pull back due to higher rates and banks reduce lending due to lower profitability. A similar trend is observed on-shore, where bank lending has been growing at a very sluggish rate. Note that foreign banks may not have access to dollar liquidity backstops like FHLB lending and the discount window, so they may be more cautious than U.S. banks. The reduction in dollar credit is likely contributing to the global manufacturing slump and will remain a significant headwind to global growth.

Takeaways by Macro Roundup® AI

  1. Off-shore dollar bank lending declined $325 billion year over year as of 2023Q1, a rate of outright contraction not seen since the 2008 financial crisis, with the bulk concentrated in lending to emerging markets.
  2. The off-shore dollar lending contraction likely reflects both supply and demand factors, with borrowers pulling back on higher rates and banks reducing lending because of lower profitability.
  3. Foreign banks may lack access to dollar liquidity backstops such as FHLB lending and the discount window, leaving them potentially more cautious than U.S. banks, while the reduction in dollar credit is likely contributing to the global manufacturing slump.

Related Articles:

AI Summary. A Chinese push to export its way out of its economic slump, allowing a further large depreciation of the yuan, could pressure parts of the U.S. economy that compete with Chinese manufacturing, absent a major increase in trade restrictions. The U.S. remains the largest market globally for consumer and imported goods.

Benjamin Hart and Brad Setser New York Magazine
Date Posted:

.@Brad_Setser notes the Yuan is at an ~ 15-year low relative to the $ and worries that China may pursue a global beggar-thy-neighbour policy by devaluing the Yuan.

.@Brad_Setser notes the Yuan is at an ~ 15-year low relative to the $ and worries that China may pursue a global...

Does a weaker yuan and export push threaten U.S. manufacturing?

Core argument: The Yuan sits at roughly a 15-year low, and a return to its level when China joined the World Trade Organization would, absent a large increase in trade restrictions, put meaningful pressure on parts of the U.S. economy.

The big way I think China could negatively impact the U.S. economy is that if China decides to export its way out, the U.S. is still the biggest market for consumer goods and the biggest market for imported goods globally. If China really wanted to export its way out, let its currency go, there would be a big further depreciation in the Yuan. And the Yuan’s already a 15-year low, more or less. If the Yuan goes back to the levels where it was when China joined the WTO, without an enormous ratcheting up of trade restrictions, there would be pressure on certain parts of the U.S. economy that I think would be meaningful. There’s no doubt that China has the biggest manufacturing base in the world. And those parts of the U.S. economy that compete with it may face difficulty if China can’t find a way to recover other than exports.

Takeaways by Macro Roundup® AI

  1. The Yuan sits at roughly a 15-year low, and a return to its level when China joined the World Trade Organization would, absent a large increase in trade restrictions, put meaningful pressure on parts of the U.S. economy.
  2. China's main channel for harming the U.S. economy runs through exports, since the U.S. remains the largest market for consumer goods and the largest market for imported goods globally.
  3. China has the world's biggest manufacturing base, and U.S. sectors that compete with it may face difficulty if China cannot recover by means other than exports.

Related Articles:

  • Setser On China’s Trade Surplus — China's trade data show manufacturing exports sharply higher, pushing its trade surplus up even as its commodity import bill hit record levels. The author argues China's currency remains managed, so a weaker yuan alongside a large surplus reflects policymakers' judgment that they must sustain export growth relative to GDP to offset domestic weakness.
  • Brad Setser On Deglobalization — Talk of "reglobalization" is premature because no real deglobalization has occurred: Chinese exports of manufactures remain at a record level relative to global output, and China continues to draw a record amount of net demand from the rest of the world to sustain its unbalanced economy.
  • Is the Chinese Government Pushing Down the Yuan? — The Bank for International Settlements measure of China's inflation-adjusted, trade-weighted exchange rate has fallen roughly 14% from its recent peak, the largest decline among the 64 countries it tracks. The author argues this reflects a policy choice, with China's central bank having outsourced foreign reserve management to state-run banks while lending increasingly large sums to the domestic banking system.

AI Summary. Tokyo's minimum wage is equivalent to about $7.65 an hour, compared with $15 in New York City, and Japan's median household income of roughly $29,000 compares with $70,784 in the US, according to government statistics in both countries. The typical Asian-American household earned just over $100,000, more than 3x the typical Japanese family.

Megumi Fujikawa Wall Street Journal
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The typical Asian-American household in the US earns just over $100,000, 3x a typical Japanese family’s earnings.

Do Japanese workers earn far less than their American counterparts?

Core argument: Median household income in Japan was about $29,000 at the current exchange rate in 2021, compared with $70,784 in the U.S. that year, according to government statistics in the two countries.

Even after a planned rise in October, the minimum wage in Tokyo will be the equivalent of just $7.65, compared with $15 in New York City. Median household income in Japan in 2021, the most recent year for which data are available, was equivalent to about $29,000 at the current exchange rate, compared with $70,784 in the U.S. that year, according to government statistics in the two countries. The typical Asian-American household brought in just over $100,000—more than triple what the typical Japanese family made.

Takeaways by Macro Roundup® AI

  1. Median household income in Japan was about $29,000 at the current exchange rate in 2021, compared with $70,784 in the U.S. that year, according to government statistics in the two countries.
  2. Tokyo's minimum wage will equal just $7.65 even after a planned October increase, compared with $15 in New York City.
  3. The typical Asian-American household brought in just over $100,000, more than triple what the typical Japanese family made.

Related Articles:

  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth
  • Japan Demographic Woes Deepen as Birthrate Hits Record Low — Japan's fertility rate fell for a seventh consecutive year to a record low of about 1.26 children per woman, far below the 2.07 rate considered necessary to maintain a stable population. Births fell 5% to 770,747, a record low, while deaths rose 9% to a record 1.57m.
  • From Strength To Strength — The US produced $25.5tn in GDP, about 25% of the world total—roughly its 1990 share—while China's share stands at 18%; the US share of the G7's nominal GDP rose from 40% in 1990 to 58%. Income per person is now about 30% above western Europe and 54% above Japan, adjusted for purchasing power.

AI Summary. Japan's defense budget rises 13% over the prior fiscal year's planned spending, part of a five-year, ¥43tn plan to lift military spending to roughly 2% of gross domestic product, versus the roughly 1% cap maintained since the 1960s. Purchases include Aegis-equipped destroyers and Tomahawk cruise missiles, with the largest share directed at the Self-Defense Forces' sustainability and resilience.

Kana Inagaki Financial Times
Date Posted:

Japan is increasing it’s defense spending 13% y/y as part of a military buildup that will double defense spending to 2% of GDP up from a self-imposed postwar cap of 1%.

Japan is increasing it’s defense spending 13% y/y as part of a military buildup that will double defense spending to...

How much is Japan raising military spending to counter China?

Core argument: Japan's 2024–25 defence budget is 13% above this fiscal year's intended spending, part of a five-year, ¥43tn plan to raise military spending to roughly 2% of current GDP from the self-imposed cap of about 1% maintained since the 1960s.

The 2024-25 budget represents a 13% rise compared with this fiscal year’s intended spending. It is part of a five-year, ¥43tn plan by Tokyo to strengthen its defence capabilities and bring military spending to roughly 2% of current gross domestic product, compared with the self-imposed cap of about 1% of GDP that Japan has maintained since the 1960s. Japan intends to build destroyers equipped with a US-built Aegis missile defence. The planned shopping list also includes the acquisition of counterstrike weapons, including Tomahawk cruise missiles. The largest portion of the requested spending will be designated to strengthening the “sustainability and resilience” of the Self-Defense Forces. The aim is to address shortages of basic items that officials fear will hamper the SDF’s ability to cope with a prolonged conflict.

Takeaways by Macro Roundup® AI

  1. Japan's 2024–25 defence budget is 13% above this fiscal year's intended spending, part of a five-year, ¥43tn plan to raise military spending to roughly 2% of current GDP from the self-imposed cap of about 1% maintained since the 1960s.
  2. Japan plans to build destroyers equipped with the US-built Aegis missile defence system and to acquire counterstrike weapons including Tomahawk cruise missiles.
  3. The largest portion of Japan's requested spending is designated for the "sustainability and resilience" of the Self-Defense Forces, addressing shortages of basic items that officials fear would hamper the SDF in a prolonged conflict.

Related Articles:

  • The Age-Old Question: How Do Governments Pay For Wars? — Denmark abolished a centuries-old religious holiday, requiring people to work that day, partly to help pay for extra defence spending, a move 70% of Danes opposed in one poll. The Stockholm International Peace Research Institute calculates global defence spending rose 4% to a record $2.24tn and is set to keep rising even as higher interest rates raise governments' borrowing costs.
  • The Cost of the Global Arms Race — Global defence spending rose nearly 4% in real terms to over $2tn, and new commitments and forecast increases, if implemented, are estimated to add more than $200bn a year worldwide. If countries below 2% of GDP reached that level and others added half a percentage point, outlays would rise by close to $700bn annually.
  • US To Link Up With Taiwan and Japan Drone Fleets To Share Real-Time Data — The US, Taiwan and Japan plan to share real-time data from naval reconnaissance drones, with Taiwan's four MQ-9B Sea Guardian drones integrated into the same system used by US forces in the region and Japan's Self-Defense Force. The arrangement would let the US and its allies view the same drone-gathered information simultaneously.